ARTI ARORA CFP CM | HEAD FINANCIAL PLANNER

Investment planning is a crucial part in the overall financial planning process. It is the action plan here and the way it is implemented and reviewed that plays a crucial role in helping one achieve their financial goals.

Mostly, we focus on returns while making an investment. For Ex- a bank fixed deposit is giving us a 5.15% return for an investment tenure of 18 months. Here, the nominal return or the return prima facie is 5.15% but if we go a little deeper to evaluate the real return, the picture would be very different.

This return of 5.15% is taxable at the tax rate or tax bracket that an individual is in. Apart from that, if the cost of living is increasing at 6%, the return from the bank fixed deposit (even without taking in account taxation) is negative.

In very simple terms, if the monthly ration you buy costs you Rs. 10000 today and this cost increases to Rs. 10600 a year later but a FD of equivalent amount increases to only Rs. 10515, you can see for yourself you are only losing money, let alone creating wealth for improving your standard of living or achieving other important financial goals that you may have.

There is no way one can create wealth or achieve their financial goals without beating inflation which is only possible by earning returns well above it, at all times.

There is enough historical data available about returns from different asset classes for one to assess how to really beat inflation through prudent investing. Equity as an asset class has at all times delivered returns much above inflation and in fact gold as an asset class too is a good hedge against it. Market linked debt investments are also an interesting avenue to consider if the investment objective is to beat inflation.

Well, the most important thing is to understand inflation and its ills and then tackle it by following an appropriate asset allocation strategy.

Let us understand this through a small example of Harsh n Shalini, both working in MNCs and earning handsome packages. Both of them had predominantly invested in bank fds and some gold. This was partially due to their being very time crunched and of course, they did not feel the need to charter into the uncertain zone and risk their hard earned money.

It was after a financial wellness program that Shalini attended at her office that she felt something badly missing in the way, she and Harsh were managing their money. Specially, when she heard some of her own junior colleagues sharing how they had put their money to work and their portfolio values were soaring. This got her inquisitive and she discussed with Harsh, the need to be more updated with respect to their finances.

Both of them then decided to consult an expert financial planner referred to them by Shalini’s friend who took them through the comprehensive financial planning process including their risk profiling. They realised how wrong they were with respect to their perception towards investing in equities and how long term investment in equities reduces the risk associated with such investments greatly. The peril of inflation and how their bigger car purchase goal remained a distant reality for them despite saving for it for last 3 years was now crystal clear to them.

When you know the real problem, solution can always be found. Here, inflation is the problem and the solution is ‘Asset Allocation’ through appropriate selection of financial products across the investment, insurance, alternates’ suite. Also, keeping a holistic 360 degree view of your financial life always helps. There are investment decisions that are multi-purpose in nature and must be administered likewise.

Harsh & Shalini’s financial life is still not completely sorted. Keep watching this space for more as we bring forth some perspectives that we are sure you will find relatable & fruitful.